A Leading Marijuana Stock Making A Comeback?
The cannabis industry has seen a massive uptick in sales during the coronavirus pandemic. While the majority of this is simply due to people staying at home, the long term effects could be huge for cannabis stocks. Not sure if you have noticed, 2019 was supposed to be the year for marijuana stocks to prove their worth to Wall Street.
The pot industry was expecting to translate their huge sales growth into recurring profits. However, it didn’t work out as planned. That was mostly due to high tax rates in certain U.S. states and supply chain issues in Canada which allowed the black market to thrive. As a result, many marijuana stocks saw two-thirds or more of their market value wiped out. The fall in value reached around $40 billion at one point in 2019. Many investors felt the pain and have since avoided marijuana stocks at all costs.
Marijuana stocks have been seeing signs of life recently and investors are reaping the benefits. The industry started gaining grounds after many marijuana stocks reported solid sales growth from their fiscal reports. In my opinion, what really fueled investors’ interest in the cannabis industry was the reverse stock split of Aurora Cannabis (ACB Stock Report). However, our focus today lies on the largest marijuana stock in the industry, Canopy Growth Corporation (CGC Stock Report).
Could Canopy Growth Help Lift The Cannabis Industry?
Canopy Growth Corporation reported its Q4 earnings before the opening bell today. First, the company recently reported that it has CA$2.0 billion of cash in hand as of March 31st, 2020. This amount is by far the largest among companies in the industry. Recently, Canopy stated that the leading alcoholic beverages company Constellation Brands (STZ Stock Report) will exercise around 19 million warrants to purchase CGC stock for a consideration of C$245 million.
This could be seen not just as a vote of confidence in Canopy, but also the wider cannabis industry. The additional cash infusion also strengthens Canopy’s position as the largest player in the market. Being the industry leader, its fiscal report is going to be a major focus today. Hence, here are few items to note from the earnings report.
Q4 Fiscal 2020 Corporate Financial Highlights:
The company reported its net revenue in Q4 2020 fell 13% versus Q3 2020 mainly due to the lower Canadian recreational revenue. Their gross margin, including one-time restructuring and additional charges came in around 85%. Adjusted gross margin performance in Q4 2020 was positively impacted by higher facility utilization and growth in high margin international medical cannabis sales.
SG&A expenses gained in Q4 2020 by 17% versus Q3 driven mainly by a combined $15 million increase in areas such as General & Administrative and Sales and Marketing expenses. CGC reported a net loss of $1.3 billion and an adjusted EBITDA loss of $102 million a $5 million loss versus Q3 2020 led by lower sales and higher operating expenses. The company’s balance sheet reported cash of $2.0 billion on March 31st, 2020, dropped from $2.3 billion at the end of Q3, reflecting the EBITDA loss, capital investments and M&A activities.
Higher Sales and Lower Cash Burn To Boost CGC Stock?
One reason why many analysts are bullish is that Canopy has got a new CEO in charge this year. David Klein came over from Constellation. As a finance-oriented guy, he is able to optimize the company’s balance sheet and make it a more investable company. His strategy includes scaling back some of the international sales in an effort to streamline the company’s operations. This in effect reduces some expenses and strengthens the company’s financial health.
Profitability is key when we look for investments, as no one wants to invest in a perennially loss-making business. For a start, business operations have to be sustainable to be attractive. Despite a massive stockpile of cash on its books, investors are hoping to see a sizable drop in operating expenses. Today’s fiscal report will demonstrate how well David Klein and the management are reducing Canopy’s ongoing cash burn.
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Canopy’s Inventory Levels To Improve?
A healthy inventory level is certainly a plus for cannabis companies. But that’s not what we are seeing in Canopy’s case. The same could be said of other Canadian licensed producers. Since 2019, the company reported that inventory levels have doubled. Meaning there was far more production than sales. And that’s not looking good from an investors’ standpoint.
That may be why the company announced the permanent closure of the Aldergrove and Delta greenhouses in March. Still, if we see significant inventory growth today, the prospect of a write-down will almost be inevitable.
Lower Share-based Compensation A Positive Signal For Canopy Stock
Canopy’s ballooning expenses were arguably the biggest obstacle in 2019. Former co-CEO Bruce Linton who was fired in early July 2019 strongly believed that the best way to motivate employees is through long-term vesting stock. But in doing so, Linton overlooked the costs that came with such a move. Through the first nine months of fiscal 2020, share-based compensation totalled almost CA$218 million. Since David took over the CEO post, he’d promise to drastically reduce share-based compensation. It would be interesting to see what sort of progress has been made on that front.
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CGC Stock Is At A More Reasonable Valuation, Should Investors Buy Now?
Canopy Growth’s stock is nowhere near its 52-week high of more than $45 a share. And that’s a good thing for investors who invested in CGC stock in the last few weeks. With the stock trading at $21.72, it is a bargain today, in comparison to where it was trading over the past three years. Of course, there’s still a likelihood that the stock could slide given the volatility in the sector. CGC is marijuana stock to watch in 2020 and beyond.